USD/JPY is positioned at 159.39 — a figure that seemed unfathomable at the beginning of the month when the pair was stabilizing around 152.50 to 153.00, prior to the comprehensive macro effects of the Iran war permeating the global currency market. The transition from the pre-conflict range to 159.39 indicates an approximate 4.60% increase in the USD relative to the JPY within a mere 13 days of ongoing conflict — a rate of yen depreciation comparable to the July 2024 scenario that compelled the Japanese Ministry of Finance to undertake actual FX intervention at levels between 160.00 and 160.40. The pair has surged above the January 2026 high to 159.420 before experiencing a slight pullback, and it is currently trading in a range where each additional pip of upward movement brings the 160.00 intervention threshold significantly nearer. The catalyst behind this shift is not the Federal Reserve, not the divergence in Bank of Japan policies, and not Japan’s trade balance — it is oil. The relationship between USD/JPY and crude prices has remained nearly perfectly positive since the onset of the conflict on February 28. When Brent spiked toward $119.50 per barrel during the week’s peak, USD/JPY surged in lockstep. As oil retraced to the $99 to $100 range following Treasury Secretary Bessent’s announcement regarding the Russian oil waiver, USD/JPY experienced a slight consolidation. The mechanism is clear: rising oil prices significantly impact Japan’s import expenses — Japan relies on imports for nearly all of its crude oil needs — while concurrently enhancing the appeal of the USD as the primary currency for global oil transactions. When the price of oil rises to $100 per barrel from $67, it effectively shifts around $33 of purchasing power per barrel from Japan’s economy to the economies of oil-producing nations that operate in dollars.
The Polymarket prediction market for the Iran war concluding before April 30 has seen a significant decline in probability, dropping from 80% to the current 47%. This represents a notable shift of 33 percentage points in less than two weeks, illustrating the market’s adjustment from expectations of a “short surgical conflict” to a scenario of a “prolonged damaging war.” The adjustment from 80% to 47% is the key figure that clarifies the 4.60% movement in USD/JPY over the past 13 days and indicates that this trend has more potential to continue. Each successive week of conflict translates to Japan incurring costs exceeding $100 per barrel for its imports, further diminishing expectations for US rate cuts, and prolonging the DXY’s position above 100. Prior to the commencement of the Iran strikes on February 28, interest rate futures indicated an expectation of around 40 to 50 basis points of Federal Reserve rate cuts by the end of 2026 — reflecting a modest yet tangible anticipation that the Fed would implement two cuts as the US economy gradually slowed from its late 2025 momentum. The pricing has been consistently undermined. Rate traders have now removed around 40 basis points of rate cut pricing since the onset of the conflict, resulting in current 2026 rate cut expectations at approximately 23 basis points — just shy of a single 25 basis point cut, which is not fully accounted for until later in the year. Polymarket and CME FedWatch data indicate that markets have shifted significantly, no longer fully pricing in even a single 25 basis point cut in 2026, marking a notable departure from the pre-war consensus.
The removal of expectations for a Fed rate cut is unequivocally bullish for USD/JPY. The calculations behind the carry trade are clear: the Bank of Japan maintains its policy rate at 0.75%, with the next anticipated increase set for Q3 2026 during the July meeting, whereas the Federal Reserve remains in the range of 3.5% to 3.75%. The interest rate differential of around 275 to 300 basis points favoring the dollar has consistently served as the cornerstone of the USD/JPY carry trade. When the market anticipated the Fed reducing rates to a range of 3.00% to 3.25% by 2026, it was expected that the differential would narrow. With 40 basis points of cut pricing removed and the Fed maintaining a range of 3.5% to 3.75% indefinitely — or possibly increasing rates if inflation driven by oil necessitates action — the carry differential remains unchanged. It is either maintaining its position or expanding. Stable or widening carry differentials indicate a structurally bullish outlook for USD/JPY.
Standard Chartered’s currency strategists Chong Hoon Park and Nicholas Chia have clearly indicated that the path of least resistance for USD/JPY is upward, with a possible test of 162 — the level that led to actual FX intervention by the Japanese Ministry of Finance in July 2024. Their analysis includes three distinct bullish elements working in tandem: sustained elevated oil prices that adversely affect Japan’s economy reliant on imports, favorable USD/JPY seasonal trends that usually emerge in the latter part of March due to window-dressing activities, and minimal verbal intervention from the Ministry of Finance that indicates — or at least suggests — a reluctance to counter the prevailing market trend while widespread USD strength drives the primary momentum.